Abstract
This paper revisits the issue of monetary influences on regional economies. It explores linkages between national financial variables and economic activity in the Detroit MSA and the state of South Carolina, regions with very different industrial structures. Tests on the information-content of money and interest rates and evaluation of contributions to forecasting regional employment reveal that interest rates outperform monetary aggregates over several business cycles. Detroit is more sensitive to interest rates than South Carolina, but the latter is far from immune to changing national monetary conditions. The spread between rates on commercial paper and treasury bills outperforms monetary aggregates as a predictor of short-run changes in the regional economies. This result is in line with findings for the nation.
Highlights
This paper revisits the issue of monetary influences on regional economies
If financial processes contain information about the future direction of the national economy, how do they perform in a regional setting? Is there a difference in regional responsiveness to changes in national financial indicators? The paper addresses these questions by exploring linkages between financial variables and cyclical behavior in two very different regions: the Detroit MSA and the state of South Carolina
Note that monetary aggregates are significantly associated with regional employment, more strongly in South Carolina than in Detroit
Summary
A spread between rates on commercial paper and T-bills may be a good predictor, because it reflects monetary policy, the state of financial markets, and expected default risks. In a dynamic sense, changing national money conditions cause an increase in liquidity preference, represented by a shift away from local assets and a backward shift in Dpr (northeast quadrant). From this perspective, the interest-rate differential between the nation and the region reflects default risk. National changes may be noticeable in either the stock of money, short-term interest rates, or both, depending on shifts in the supply of or demand for credit
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